Circuit Breakers and the Tail Index of Equity Returns

Abstract

CIRANOLe CIRANO est un organisme sans but lucratif constitué en vertu de la Loi des compagnies du Québec. Le

Extreme dependence in the NASDAQ and S&P 500 composite indexes

“…These figures use two sample sizes, the first beginning with the first available observation on the NASDAQ composite index, that is 11 October 1984, and a second shorter sample beginning 1 November 1988. The second sample is chosen for consistency with the results of Galbraith and Zernov (2004), suggesting a structural break in tail behaviour in the neighbourhood of 1985-1988, a period of relatively uncontrolled program trading followed by the introduction of the first circuit breakers in US equity markets; we therefore examine both the full sample and the shorter sample which omits this period. The two samples are of sizes 4890 and 3865 daily observations, in each of the two equity markets.…”

“…For example, Longin (1996) and Longin and Solnik (2001) studied properties of extremes of equity market returns; Longin (1999) and Cotter (2001) considered futures markets, and in particular margin requirements and exceedances. Galbraith and Zernov (2004) studied changes in the tail index of equity returns in the context of evolving elements of market architecture such as circuit breakers. A similarly substantial literature considers extremes in foreign exchange markets; Koedijk et al (1990) and Quintos et al (2001) are two examples.…”

Autoregressive conditional tail behavior and results on Government bond yield spreads

“…Their analysis documents structural breaks in the tail index of emerging stock index returns during the 1997 Asian crisis. A related study is by Galbraith and Zernov (2004); using daily U.S. stock market returns during the period 1960 -2002, they document increased tail fatness for the subperiod starting in the mid-1980s. In contrast to the other studies, Chavez-Demoulin, Davison, and McNeil (2003) do not model time-varying tails but use extreme value theory in a setting that allows for time variation in the arrival intensity and the distribution of excesses of a given high threshold.…”

Is risk higher during non-trading periods? The risk trade-off for intraday versus overnight market returns

“…Straetmans and Candelon (2013) test for structural change in the tail index and find that stationary tail behavior over long time spans can well be assumed for emerging as well as developed stock markets. Financial risk management applications based on tail index estimation methods include for example Bali and Neftci (2003), Danielsson and de Vries (2000), Galbraith and Zernov (2004), Phillip and Pagan (1997), Lauridsen (2000), Longin (2000), Wagner and Marsh (2005). tail risk can become dominant for a high probability level.…”